European Parliament Votes to Adopt SSM

On 12 September 2013, the European Parliament published a press release announcing the adoption of a package of legislative acts to set up a Single Supervisory Mechanism (SSM) for the Eurozone.  The SSM legislation was adopted with very large majorities and will bring the EU’s largest banks under the direct oversight of the European Central Bank (ECB) from September 2014.

The SSM legislation consists of a proposed regulation conferring specific tasks on the European Central Bank concerning policies relating to the prudential supervision of credit institutions and a proposed regulation amending Regulation 1093/2010 (see this blog post for more details).  The European Parliament has also published a document containing the provisional texts adopted which can be found on pages 105 and 50 respectively.

The Regulations will come into force following approval by the EU Council and publication in the Official Journal of the EU.  The ECB will assume its supervisory role 12 months later.

EU Commission proposes Single Resolution Mechanism

On 10 July 2013, the EU Commission proposed a Single Resolution Mechanism (SRM), a complement to the Single Supervisory Mechanism (SSM) and one of the building blocks of EU Banking Union.  The SRM is designed to ensure that the resolution of a failing bank can be managed efficiently with minimal costs to taxpayers and the real economy.

The proposed SRM would apply the substantive rules of the Recovery and Resolution Directive (RRD). The EU’s Council of Finance Ministers reached agreement on a general approach to the RRD on 27 June and the EU Parliament’s Committee on Economic and Monetary Affairs adopted its report on 20 May. Negotiations between the Council and the European Parliament are due to start soon with the aim of reaching final agreement on the RRD in autumn 2013.  At its recent meeting, the EU Council of Ministers set themselves the target of reaching agreement on the SRM by the end of 2013 so that it can be adopted before the end of the current European Parliament term in 2014. This would enable it to apply from January 2015, together with the RRD.

Under the SRM:

  • the European Central Bank (ECB) would signal when a bank in the euro area or established in a Member State participating in the Banking Union was in severe financial difficulties and needed to be resolved;
  • a Single Resolution Board, consisting of representatives from the ECB, the EU Commission and the relevant national authorities, would prepare the resolution of a bank;
  • a Single Bank Resolution Fund, funded by contributions from the banking sector and replacing national resolution funds, would be set up under the control of the Single Resolution Board;
  • on the basis of the Single Resolution Board’s recommendation, or on its own initiative, the EU Commission would decide whether and when to place a bank into resolution and would set out a framework for the use of resolution tools and the Single Bank Resolution Fund; and
  • under the supervision of the Single Resolution Board, national resolution authorities would be in charge of the execution of a resolution plan.

EU Council publishes final compromise SSM text

On 25 April 2013, the Council of the EU published the final compromise texts of a regulation conferring specific tasks on the European Central Bank concerning policies relating to the prudential supervision of credit institutions and the proposed regulation amending Regulation 1093/2010 (which established the European Banking Authority).  Together these texts establish the EU single supervisory mechanism (SSM).

Broadly, under the new regime, the European Central Bank (ECB) will assume responsibility for the supervision of “significant” credit institutions, with “less significant” credit institutions to remain subject to regulation by national supervisors.  “Significance” is to be based on the following criteria:

  • size;
  • importance for the economy of the EU or any participating Member State; and
  • significance of cross-border activities.

In addition, any credit institution will be regarded as “significant” if:

  • it has total assets of EUR 30 billion or more; or
  • the ratio of its total assets to the GDP of the participating Member State of establishment exceeds 20% (unless the total value of its assets is below EUR 5 billion); or
  • the ECB considers it to be of significant relevance; or
  • it has requested or received public assistance directly from the European Financial Stability Facility or the European Stability Mechanism;
  • it ranks amongst the three most significant credit institutions in a participating Member State.

The ECB will assume responsibility for, inter alia:

  • authorisations and withdrawal of authorisations;
  • the administration of certain activities currently carried out by home state regulators, such as the establishment of branches in non-participating Member States;
  • the assessment of applications for the acquisition and disposal of “qualifying holdings” (i.e. involving 10% or more of capital or voting rights);
  • the regulation of own funds requirements, securitisations, large exposure limits, liquidity, leverage, and reporting and public disclosure of information on those matters;
  • the enforcement of governance arrangements, risk management processes, internal control mechanisms, remuneration policies and internal capital adequacy assessment processes;
  • conducting supervisory reviews and stress testing;
  • consolidated supervision where parent companies are established in participating Member States; and
  • supervisory tasks in relation to recovery plans, early intervention and structural changes required to prevent financial stress or failure (but excluding any resolution powers).

ECB Opinion Reveals Approach to “Principle of Proportionality” under RRP – in a Manner of Speaking

On 19 April 2013, pursuant to a request from the Austrian Ministry of Finance, the European Central Bank (“ECB”) published an opinion (dated 11 April 2013) on certain draft Austrian recovery and resolution planning (“RRP”) legislation – the draft Banking Intervention and Restructuring Act and associated amendments to the Federal Banking Act and the Financial Market Authority Act (the “Draft Law”).

In general, the ECB welcomed the Draft Law, but commented, amongst other things that it:

  • does not contain the resolution tools required by Title IV of the EU Recovery and Resolution Directive (“RRD”); and
  • requires credit institutions (“CIs”) to prepare and submit resolution plans to the Austrian Financial Market Authority (“FMA”), rather than make this a responsibility of the FMA itself.

On the principle of Proportionality, the ECB noted that the Draft Law provides for a complete exemption from a CI’s obligations to submit an RRP if that CI’s insolvency can be presumed not to have any material adverse impact on the financial markets, on other CIs or on funding conditions.  The ECB considers that Article 4 of the RRD does not allow such a complete exclusion, providing only for simplified obligations for certain less systemically important CIs.  Furthermore, the ECB itself remains of the view that it is perfectly possible to make all CI’s subject to RRP legislation, whilst merely simplifying RRP requirements for smaller CIs.  Nonetheless, the ECB acknowledges the ongoing discussions within Europe on the subject of enabling Member States to waive the requirement to maintain and update RRPs in certain cases and understands the benefit in avoiding overburdening small CIs.  As such, it recommends that any such exemption is granted only under “very strict conditions in accordance with the proportionality principle of the RRD”.

Not very helpful advice, given the admission that the proportionality principle of the RRD does not permit a full exemption.  The net result is that there is still no answer to the question as to whether a non-systemically important bank will be able to benefit from a complete exemption from RRP legislation.

EU Council and Parliament Reach Agreement Over SSM

On 18 April 2013, the EU Council published a press release confirming that agreement had been reached with the EU Parliament on the establishment of the single supervisory mechanism (SSM) with respect to EU credit institutions.

The European Central Bank (ECB) will be responsible for administration of the SSM, but national supervisors will retain responsibility for takes not conferred on the ECB, such as consumer protection, money laundering, payment services and branches of third country banks.  The ECB will assume its supervisory role with respect to the SSM either on 1 March 2013 or 12 months after entry into force of the legislation, whichever is later to occur.

ECB Publishes Letter on Scope of SSM

On 4 April the European Central Bank (ECB) published a letter from Mario Draghi, President of the ECB, to Nuno Melo, MEP regarding the scope of supervisory responsibilities under the Single Supervisory Mechanism (SSM).

In the letter, the ECB makes clear that the scope of the SSM is designed to include all credit institutions in the euro area and in non-euro area Member States wishing to participate within the SSM.  Furthermore, the current draft legislation regarding the SSM distinguishes between “significant” and “less significant” banks according to:

  • size;
  • importance to the economy;
  • cross-border activity; and
  • whether or not they benefit from direct EU financial assistance.

The ECB will have full supervisory powers over significant banks, with the assistance of national supervisory authorities.  However, in order to ensure that it can effectively supervise all credit institutions within participating Member States, the ECB will also have certain powers with respect to less significant banks, namely:

  • national supervisory authorities will need to abide by ECB regulations, guidelines and instructions; and
  • the ECB may, at any time, decide to exercise direct supervision over less significant banks, based on the supervisory data on such institutions to which it will have access.

ECB Questions the Point of Non-Viability Under the RRD

The opinion of the European Central Bank (“ECB”) (dated 29 November 2012) on the proposed directive establishing a framework for recovery and resolution of credit institutions and investment firms (the “RRD”) was recently published in the Official Journal of the EU.  The opinion addressed a number of issues under the RRD and suggested various amendments to the text of the directive.  The extent to which the ECB’s suggestions will ultimately be adopted is as yet unknown.  However, a number of elements are worthy of note.

The ECB proposals included amending the resolution objectives so as to require the protection of all deposits and not only those which benefit from the statutory EUR 100,000 protection limit.  CCPs in particular will also welcome the ECB’s suggested amendments to Articles 32 and 34 of the RRD such that any bridge institution or purchaser of a failed firm must continue to meet regulatory membership criteria of relevant payment, clearing and settlement systems – an amendment which the ECB specifically notes is designed to enable the operators of such systems to assess whether the bridge institution/purchaser continues to meet relevant membership criteria.  However, of most interest, were the ECB’s comments regarding the point of non-viability under the RRD.

At a principal level, the ECB believes that institutions that are failing or likely to fail should be liquidated under national insolvency proceedings if there is no public interest concern in their resolution.  Bail-in powers should only be used to maintain an institution that has reached the point of non-viability as a “last resort”.  Accordingly, the ECB proposes to amend the definition of “resolution” under the RRD so as only to allow restructuring of an entire institution in ‘exceptional and justified’ circumstances.

At a more practical level, the RRD currently entitles resolution authorities to take a resolution action if either the resolution authority or the competent authority determines that an institution is failing or likely to fail.  However, in the opinion of the ECB, the role of the competent authority as prudential supervisor and regulator makes it best placed to determine, for example, whether an institution is in breach of its capital requirements for continuing authorisation.  As such, the ECB considers that the “competent authority” alone should make the determination as to whether an institution has reached the point of non-viability and suggests amending Article 27(1)(a) of the RRD accordingly.  Moreover, the decision of any competent authority as to whether an institution is actually failing or likely to fail, should be based solely on an assessment of the prudential situation of the institution in question.  As such, a need for state aid should not, in itself, represent conclusive evidence that an institution is failing or likely to fail, although it would be taken into account in assessing the institution’s prudential situation.

European Bank Resolution Mechanism Next on the Agenda

On 7 February 2013, Benoît Cœuré, Member of the Executive Board of the European Central Bank (ECB) gave a speech entitled “Central Banking: Where Are We Headed?”

In the main, the speech detailed the way in which the ECB could assume a banking supervisory role alongside its existing monetary policy functions whilst avoiding conflicts of interest.

Mr Cœuré believed that there were actually “desirable synergies” between the two roles.  However, he recognised that the independence of the ECB must be protected and views the creation of well-functioning European bank resolution mechanism as crucial in this respect as it would:

  • limit residual risk to governments’ balance sheets, in particular through the timely implementation of bail-in instruments, and
  • ensure a strict separation between supervision and resolution.

As such, a European wide bank resolution mechanism will be implemented as the second leg of banking union, with 2013 a key year for making progress.

The Single Supervisory Mechanism: “Singleness” a Question of Degree Only?

On 29 January 2013, Vítor Constâncio, Vice-President of the European Central Bank (ECB), gave a speech in Frankfurt to the Banker’s Association for Finance and Trade – International Financial Services Association Europe Bank-to-Bank Forum entitled “Establishing the Single Supervisory Mechanism”.

Broadly, the legislative framework establishing the Single Supervisory Mechanism (SSM) provides that, of Europe’s 6,000 banks, the ECB will have direct responsibility only for:

  • systemically important European banks; and
  • banks which have received or requested public financial assistance.

In fulfilling its duties, the ECB will be assisted by national competent authorities, acting in accordance with ECB instructions.  In practice, the ECB will assume direct responsibility for over 80% of the euro area banking system in terms of assets.  However, the actual number of banks coming under direct ECB supervision may be as low as 150, with the remaining banks continuing to be supervised by their national competent authorities.

This has raised concerns about the creation of an uneven playing field and the possible effects on the completion of the single market.  It is felt that this is driven in the main by a desire that the politically influential German Landesbanks escape direct ECB supervision.  Nonetheless, Sr Constâncio believes that the difference between the two systems of regulation “will concern only the degree of centralisation of supervisory responsibilities within the single supervisory mechanism composed by the ECB and the national supervisory authorities”.  The “singleness of the SSM” would be ensured by virtue of the fact that:

  • national supervisory authorities will have to comply with ECB regulations;
  • the ECB will have access to data concerning all credit institutions;
  • the ECB may decide at any time to exercise direct supervisory power over a bank; and
  • the ECB would in any event wield powers affecting banks “from their birth (i.e. the authorisation to operate) to their death”.

Subject to operational arrangements being in place, the ECB is due to assume its new supervisory role on 1 March 2014 or 12 months after entry into force of the legislation, which occurs later.  Currently, the SSM legislation is the subject of trialogue negotiations between the EU Council, EU Commission and EU Parliament.  This process is due to end soon, but unfortunately, it may be some time before we truly know the degree to which this is merely about ‘degrees of centralisation’ rather than a political compromises which threatens to give rise to a two-tier banking system within Europe.

EMU Roadmap Sheds Light on Future Resolution Initiatives


On 6 December 2012, the EU Council published a report entitled “Towards a Genuine Economic and Monetary Union”, building on an interim report on the same topic published in October 2012.  It proposes a timeframe and a 3-stage approach to the completion of Economic and Monetary Union (EMU), describing the RRP-specific requirements which form part of this initiative, as detailed below.

Stage Timescale Description 
Stage 1 End 2012 – beginning 2013

Ensuring fiscal sustainability and breaking the link between banks and sovereigns.

From an RRP perspective, this would involve:

  •   The   establishment of a Single Supervisory Mechanism (SSM) for the banking sector;
  •   Agreement   on the harmonisation of national resolution and deposit guarantee frameworks;
  •   Ensuring   appropriate resolution funding from the financial industry; and
  •   Establishing   the operational framework for direct bank recapitalisation through the   European Stability Mechanism (ESM).
Stage 2 Beginning 2013 – end 2014

Completing the integrated financial   framework and promoting sound structural policies at national level.

RRP specific measures would include the establishment of:

  •   A   single resolution authority (SRA); and
  •   A   financial backstop, in the form of an ESM credit line to the SRA.
Stage 3 Post 2014

Establishing a mechanism to create the   fiscal capacity necessary to enable EMU members to better absorb future country-specific   economic and financial shocks.

Single Supervisory Mechanism

The Council regards it as imperative that preparatory measures with respect to the SSM commence at the beginning of 2013, so that the SSM can be fully operational from 1 January 2014 at the latest.  This will involve granting strong supervisory powers to the ECB.

Single Resolution Mechanism (SRM)

Measures to establish the SSM are to be complemented by an SRM, build around an SRA and established at the same time as the ECB assumes its supervisory responsibilities with respect to the SSM.  Whilst the SSM would provide a “timely and unbiased assessment of the need for resolution”, the SRA would ensure timely and robust resolution measures are actually implemented in appropriate cases.  In other words, the SRM would complement the SSM by making certain that failing banks are restructured or closed down swiftly.  The establishment of an SRM is regarded as an indispensable element in the completion of EMU as it would:

  • Promote a timely and impartial EU-level decision-making process: it is hope that this would mitigate many of the current obstacles to resolution, such as national interest and cross-border cooperation frictions;
  • reduce resolution costs;
  • break the link between banks and sovereigns; and
  • Increase market discipline by ensuring that the private sector and not the taxpayer bears the cost of bank resolution

The SRM would be financed via a European Resolution Fund.  In turn, the fund would be financed via ex-ante risk-based levies on all banks directly participating in the SSM.  As mentioned previously, the fund would be buttressed by an backstop in the form of an ESM credit line to the SRA.  However, any support provided via the ESM would be recouped in the medium term by way of ex-post levies on the financial sector.

Deposit Guarantee Schemes (DGS)

References to an EU-wide deposit guarantee scheme seem to have been dropped in favour of a proposal to ensure that sufficiently robust national deposit insurance systems are set up in each Member State.  This, it is hoped, will limit the contagion effect associated with deposit flight between institutions and across countries, and ensuring an appropriate degree of depositor protection in the EU.

Financial Shock absorption function (FSAF)

This stage 3 measure would likely take the form of a contract-based insurance system set up at an EU level. Whilst RRP-specific, the establishment of an FSAF is seen as contributing to macroeconomic stability and therefore providing important support to the effectiveness of bank resolution measures in stages 1 and 2.  However, the Council is keen to emphasise that the FSAF would not be an instrument for crisis management per se, as this is a role to be performed by the ESM.  Rather, the purpose of FSAF would be to improve the overall economic resilience of EMU and eurozone countries.  In other words, it would contribute to crisis prevention and make future ESM interventions less likely.